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Shi Zhengrong, Chairman and Chief Executive Officer of Suntech Power Holding Co., Ltd. He was a Forbes billionaire in 2008 with a net-worth of $2.9 billion and is now worth $276 million due to stock plunge. (Image credit: Getty Images North America via @daylife)

Amidst a full-blown solar trade war with the U.S., the Chinese government has declared backing for its ailing solar energy industry, which has dominated the world market on the strength of very low prices, but is now struggling for survival due to decreasing global demand and steep tariffs levied by the US.

New solar power capacity hooked up to China's largest power grid operator surged more than five-fold in September to 2.71 million kilowatt-hours from 524,900 kilowatt-hours during the same period last year, China's State Electricity Regulatory Commission announced on Wednesday.

From January to September, the China State Grid purchased 2.48 billion kilowatt hours of photovoltaic power, up 537% from the previous year.

In a bid to help the struggling solar companies, the grid operator unveiled a number of measures last week to ease pressures facing solar project operators in connecting power plants to the electric grid. One measure is free grid connection for small-and-medium-scale solar power producers. Official figures indicate that 25% of the power generating capacity of new solar plants in 2011 went unused because the plants could not maintain a connection with the electric grid.

This is just part of a recent wave of China’s supportive government initiatives. Beijing will soon launch an $11 billion (70 billion yuan) emergency stimulus plan to rescue the solar industry, the Guangzhou-based Southern Daily quoted Wang Sicheng, an expert from China’s top economic planning body, as saying. The stimulus project will be sponsored by several government departments, including the National Development and Reform Commission (NDRC), State Grid and the National Energy Administration, Wang Sicheng, a senior energy researcher from NDRC, said at a solar industry conference in Beijing last week.

How the aid will be structured remains unknown. But Wang assumed the measures will be spread out over a few years to provide longer-term demand for solar panels and installations, partly in the hope of bridging a gap in global demand and restoring a market balance.

China’s local governments have already rushed to rescue several debt-ridden industry giants, to ensure the companies survive the current crisis and sustain local jobs and economic growth.

The market has been filled with speculation regarding the possible nationalization of Wuxi-based Suntech Power, the world's largest maker of solar cells. The troubled company received a $32 million (200 million yuan) emergency fund from state-owned China Development Bank, according to the China-based 21st Century Business Herald newspaper, quoting a source in the bank as saying on Oct. 26. The money for Suntech is reportedly a bridge loan to help repay some of its loan interests. The company faces a debt payment of about $541 million early in 2013, and owes $2.35 billion in total. In September, Suntech announced it would cut 1,500 jobs and reduced production plans for the fourth quarter.

Shi Zhengrong, founder of Suntech Power and a former billionaire (in 2008), but now worth only $276 million, is reportedly headed for a showdown with Wuxi government. A report by 21st Century Business Herald on Oct.26 quoted a bank source in Wuxi as saying that the government has offered to give Shi the funds he desperately needs. But the paper said a key condition would require Shi to provide his own personal assets to guarantee that those bonds would be repaid. That means Shi would probably lose the 30% of Suntech shares he owns. Another proposal by the government would see Suntech Power delist from New York Stock Exchange and become a state-owned company. Shi reportedly refused the two government proposals and wanted to protect the New York-listed Suntech Power by letting its core subsidiary in Wuxi go bankrupt, according to the 21st Century Business Herald report. Gong Xuejin, Suntech Power's Vice President of Media Relations, denied to the newspaper that Suntech Power would delist or file for bankruptcy for its subsidiary in Wuxi. He didn't comment on the two government proposals.

Forbes calls to Gong Xuejin on Wednesday were not answered. The North America communications manager for Suntech Power did not answer a call, nor did he respond to Forbes' query in regard to Wuxi government's rescue proposals.

Meantime, another solar giant has accepted a rescue package by a local government and has become a state-owned enterprise. With its net losses almost doubling in the second quarter and a debt ratio of 93 percent in the first half, LDK Solar, the world's second largest producer of solar wafers, sold a 20 percent stake to Heng Rui Xin Energy, a Chinese state-run entity, for approximately $23 million on Oct.22. According to the LDK announcement, state-owned Asset Management Co. holds a 40% stake in Heng Rui Xin. The remaining 60 percent is owned by Hi-Tech Wealth Investment and Developing Co.

“They [Chinese central government] dig deep dig into their pockets and bail out these companies,” Patrick Chovanec, professor at Tsinghua University’s School of Economics and Management, said on his blog about the Chinese government’s bailout of solar industry, “Because what they’re really afraid of is, you know, we’ve seen this over the past couple of months, that even relatively small companies, when they fail in China, they’re so intertwined in terms of their credit relationships and the local economy that essentially everything’s too big to fail.”

Beijing has been aggressive about pursuing clean energy. Its latest five-year plan calls for expanding solar capacity to 21 gigawatts by 2015. In a mandate issued last month, China's National Energy Administration said every province will be required to construct a series of small photovoltaic plants that together will generate more than 15 gigawatts of electricity, in a bid to boost domestic solar demand.

Editor's note: This article has been updated to accurately reflect the size of the increase in solar power capacity connected to China's largest grid operator in Sept. 2012 compared to a year earlier.